Jim Flaherty’s Changes to Mortgage Qualification Rules

Finance Minister Jim Flaherty announced three changes to Canadian mortgage rules on February the 16th. These are important changes, but less important that what Mr. Flaherty did not change. There had been industry talk of increasing the minimum down payment from 5% to 10% and shortening the maximum amortization period from the available 35 years. Thankfully Jim Flaherty understood that increasing the down payment rules and shortening the amortization would potentially put the brakes on higher priced markets like Toronto, Vancouver and Calgary.

The changes that the Finance Minister did make are designed to impact real estate speculators and heavily indebted people looking to roll higher priced debt into their mortgages. The every day home purchaser should not notice much of a difference following the implementation of the changes as of April 19th, 2010. These changes impact mortgages with less than 20 per cent down that are covered by government backed mortgage insurance, in the following ways:

– Increased mortgage term used for mortgage qualification calculations. Regardless of the term or type of mortgage the consumer selects, they must qualify against the 5 year fixed rate. This is up from the 3 year fixed rate that is currently used for qualification. Once qualified against the 5 year fixed rate, the consumer can select whichever type and term of mortgage they wish. This approach will insulate borrowers from the shock of the rising rates in the future.

– Increased down payment requirements for income properties when the property is not the owner’s principal residence. Investors that purchase these investment properties will have to come up with a 20% down payment to qualify for mortgage insurance as of April 19th, 2010, instead of the 5% down payment required at the moment. Currently, very few investors would purchase a rental property with 5% down payment.

– Mortgage refinance restrictions. Home owners that are looking to roll higher priced consumer debt into their longer term, lower cost mortgage debt through refinancing will face limited access to their equity. Currently, home owners are able to take up to 95% of the equity out of their homes. As of April 19, 2010 refinancing will only be allowed to a limit of 90% of the equity of the home.

Jim Flaherty’s changes to mortgage qualification rules are slightly more restrictive than what was in place prior to his February 16th, 2010 announcement. However, he has not implemented any changes that will put healthy Canadian real estate markets in shackles. These are responsible restrictions that will help the real estate market avoid over heating and heading toward bubble territory.

Should you have any questions about this or any other piece on the 905 West Word blog please feel free to contact me at rdavison@trebnet.com or 905-330-1241.